The Law of Insurance Warranties

Flawed Reform and a New Perspective

Alastair Owen

• Editorial: Informa Law from Routledge
• Año: 2021
• ISBN:
  9781000398519
• Edición: 1
• Categoría: Law
• Categoría: Commercial Law

The book provides a detailed review of efforts to reform the law on insurance warranties in Australia, New Zealand and the UK, arguing that none of these have been successful. The text proposes a radical new approach to reform of this area of the law, demonstrating through detailed stress testing of these proposals that they would deliver more consistent and equitable outcomes than those achieved to date.

Reform of the historically inequitable law of insurance warranties in commercial insurance has been introduced in Australia, New Zealand and, most recently, the UK. This book demonstrates that all these reforms have flaws and that none of them can be relied upon to deliver consistently equitable and predictable outcomes; in particular the UK's, as yet largely untested, Insurance Act 2015 is shown to have serious flaws that have not previously been identified. Building on lessons from these three jurisdictions, the book sets out an alternative approach for dealing with breaches of insurance warranties and demonstrates that this would consistently deliver better outcomes than any of the existing attempts at reforming this area of the law.

Providing an unprecedented multi-jurisdictional review of the law on insurance warranties and in particular the treatment of warranties in the Insurance Act 2015, as well as outlining an innovative and radical alternative approach to reform, the book will be of considerable interest and value to practitioners, academics and students, as well as to other common law jurisdictions contemplating reform of this area of the law.

CHAPTER 1

Introduction

DOI: 10.4324/9781003031734-1

1.1 The treatment of breaches of insurance warranties in England and Wales has long been recognised as a source of injustice and a potentially damaging slight on the reputation of the London insurance market and the English legal system. Any breach, however minor, historically resulted in automatic termination of the policy, regardless of the absence of a causal link between breach and loss. The playing field was tilted firmly in favour of the insurer. A number of overseas jurisdictions have introduced legislative change in order to seek to redress this imbalance. It was not until the Insurance Act 2015, which became law in August 2016, that similar change was introduced in England and Wales.

1.2 In critically reviewing the reform initiatives implemented to date, the objective of this volume is to examine whether it is possible to develop a ‘one size fits all’ approach that provides a simple and clear pathway for addressing breaches of insurance warranties (and other provisions giving the insurer the ability to escape liability), while at the same time delivering outcomes that provide an equitable balance between the interests of the insured and insurer.

1.3 This book is confined to the law of insurance warranties in commercial insurance; it does not address the law in relation to consumers. This author is of the view that it is on the area of commercial insurance that the reputation of the London market most relies and that it is the impact of the Insurance Act 2015 on the commercial insurance market that will most affect that reputation.

1.4 While in some jurisdictions, such as Australia, marine insurance is subject to a separate regime from other commercial insurance, this is not the case in the UK. Nevertheless, there are aspects of marine insurance, notably the regime of implied warranties, that are unique to that sphere. Implied warranties were not abolished by the Insurance Act 2015; accordingly this book examines implied warranties in marine insurance and considers whether a separate regime for marine insurance warranties can be justified in the UK. The Insurance Act (s10 and s11) specifically applies to implied warranties, and the view of this author is that a failure to reform implied warranties represents an omission, not least because in the modern era they are an increasing source of controversy. Accordingly the proposals for reform set out in this volume include specific recommendations in relation to implied warranties.

1.5 The history of insurance warranties is reviewed, both in terms of statutory provision under the Marine Insurance Act 1906 and the common law, highlighting the historic imbalance in favour of the insurer. Attempts by the courts and the market to address the shortcomings of the law are assessed with the conclusion that ultimately they were no substitute for statutory reform. The evolving position of the Law Commission regarding reform of the law in this area, culminating in its latest report in 2014 which led directly to the measures now incorporated in the Insurance Act 2015, is critiqued.

1.6 The approach adopted in England and Wales in the Insurance Act 2015 is compared with reform initiatives in Australia and New Zealand; prior to the enactment of the Insurance Act, these were the two common law jurisdictions that had already reformed the law of insurance warranties. As a result these jurisdictions provide an excellent basis for examining both the challenges and pitfalls of reforming this sphere of the law. In the view of this author, while the approaches in both Australia and New Zealand have their (different) merits, neither is successful in providing a comprehensive solution to the historic problems and ongoing challenges with the law of warranties. In examining the approach adopted in each of these jurisdictions, this volume analyses both the merits and shortcomings of the particular mechanisms; this analysis is then supported by comprehensive ‘stress testing’ of the approaches in which each jurisdiction’s regime is hypothetically applied to the facts of a range of key historic cases. This analysis demonstrates that, while in both New Zealand and Australia, reform has undoubtedly improved the position of the insured, the approaches in each jurisdiction have their own, separate, shortcomings, confirming that, in the view of this author, neither can be seen as offering a template for a long-term comprehensive solution.

1.7 In critically reviewing the provisions of the Insurance Act 2015, a number of the reforms in the Act are welcomed, but analysis demonstrates several shortcomings and potential problems posed by the legislation. In particular, this author argues that the final form of s11 of the Act is likely to create an unwelcome degree of uncertainty and consequential litigation. This volume demonstrates that the ‘risk as a whole’ formula, incorporated within s11, is likely to be especially problematic. It is suggested that the purported absence of a causal linkage mechanism is a further missed opportunity and analysis shows that it is unclear to what extent s11 addresses exclusion clauses and conditions precedent. It is further argued that the inability to take account of any prejudice suffered by the insurer and the lack of a right for the insurer to terminate in the event of a breach will hinder the ability of the legislation to deliver balanced outcomes.

1.8 In order to test and compare the approach in the Insurance Act with those in New Zealand and Australia, the provisions in the Act are ‘stress tested’ by applying the new legislation to the facts of past cases. This ‘stress testing’ demonstrates that the framework offered by the Act, and in particular s11, is likely to be fraught with issues and uncertainties and falls short of providing a comprehensive solution; at best, it represents a case of two steps forward and one step back.

1.9 Drawing on its evaluation of the approach adopted in the three jurisdictions reviewed, the book summarises the key challenges encountered in seeking to find an equitable and workable solution to the issue of insurance warranties. This provides a picture of the complexity that any alternate solution would need to address and represents a matrix for testing the likely effectiveness of any new approach.

1.10 Building on the experience of all the jurisdictions examined, the author proposes a new and unique solution to the issue of breaches of insurance warranties and similar provisions. Although based firmly on a causal linkage approach, the proposed solution also combines features drawn from the approaches adopted in Australia and New Zealand, as well as elements from the Insurance Act; however, it also introduces new and innovative features proposed for the first time. By ‘stress testing’ this new approach against historic cases, the book demonstrates that the recommended structure provides a more equitable, straightforward and malleable solution than that offered either by the Insurance Act, or the approaches adopted in Australia and New Zealand.

1.11 Concluding on a note of caution, the book recognises that the many years the Law Commission spent examining this issue, combined with the realities of practical politics and the impacts of the COVID-19 pandemic, means that it is unfortunately very unlikely there will be any appetite to revisit the issue of insurance warranties for several years in England and Wales. The solution offered by s54 of the Insurance Contracts Act in Australia is, despite its flaws, now well accepted by the market and accordingly it is again unlikely that there would be much appetite for radical reform in that jurisdiction, although improvements to the operation of aspects of s54 of the Insurance Contracts Act and the separation of the marine insurance regime remain possible areas of legislative action. While some reform to s11 of the New Zealand Insurance Law Reform Act has been recommended and is again under consideration, this is likely to take the form of tinkering with the existing regime, rather than radical reform.

1.12 Nevertheless, a number of other common law jurisdictions, for example Singapore and possibly Hong Kong, recognise the need to introduce reform in relation to insurance warranties, but have yet to take steps to do so. In those jurisdictions, the solution set out in this book potentially offers a reform package with significant advantages over the approaches adopted in England and Wales, Australia and New Zealand.

CHAPTER 2

The origin and history of warranties

DOI: 10.4324/9781003031734-2

Early marine insurance

2.1 The concept of marine insurance first appears to have been introduced to England in the thirteenth century by Lombardian merchants. This early form of insurance was based on the marine insurance that had been developed in Europe in the early part of the twelfth century. The Royal Exchange in Lombard Street was established under a Royal Charter in 1570; at this stage merchants themselves were the main providers of insurance. Despite its common heritage with insurance law in Europe, from the sixteenth century onwards the law in England began to diverge significantly from that on the continent. The Chamber of Assurances at the Royal Exchange, established in 1577, doubled as both an underwriting and arbitration centre and a register for marine policies.¹ One of the earliest recorded London policies was issued in 1547 on the cargo of the vessel Santa Maria Venetia;² the policy was written in Italian, but subscribed to by London merchants. The earliest known insurance claim was filed in the Court of Admiralty in 1524,³ and in the second half of the sixteenth century most insurance cases were decided in Admiralty courts. The first reported English judicial ruling upon a marine policy in the King’s Bench was in 1588. By the end of the sixteenth century the concept of Bottomry Bonds was well established; under such bonds the shipowner received a loan in advance of the voyage, on security of the vessel, to be repaid with interest if the vessel arrived safely within the agreed period; however, the assured would retain the benefit of the loan if the vessel was lost or repairs were required to complete the voyage.⁴ The Merchant Assurances Act 1601 established a special Court on Policies of Assurance. The Act, under which the Lord Chancellor was to appoint a standing commission, failed to work as intended and was amended in 1662, but judgements could be enforced against vessels and cargos. The Act lapsed and was replaced by a system of arbitration established under the Arbitration Act 1698.

1Rossi, Insurance in Elizabethan England, The London Code, 2016.

2R Merkin, Foundations of Marine Insurance: Law, War and Trade, draft: not yet published; extract kindly provided to the author.

3Cavalicant v Maynard in 1550 is the first known case where the parties are named.

4Franchiottie v Schroder ((1593), SS XI, pg 175) provides an example of such a bond.

2.2 The cost of the War of the Spanish Succession (the end of which was marked by the 1713 Treaty of Utrecht) was to some extent met by the South Sea Company which had been formed in 1711 with a charter from Queen Anne and which assumed a substantial proportion of the national debt. As part of the arrangements, the company was given exclusive trading rights in the Americas. The initial success of the company led to a number of attempts to raise capital on speculative, and often fraudulent, overseas ventures. Many of these were based around forms of insurance. The Bubble Act of 1720 was introduced in order to reduce these speculative ventures and funnel investment to the South Sea Company. In order to curb gambling, the Marine Insurance Act of 1746 effectively outlawed insurance where the policyholder held no interest in the subject of the insurance (an ‘insurable interest’).

2.3 Several provisions in the Bubble Act were directed at marine insurance. Royal Charters were issued to two corporations, the Royal Exchange Assurance and London Assurance, and conferred upon them the right to effect loans by way of bottomry. Until 1824, they remained the only joint-stock firms with such a charter.⁵ Legislation introduced in 1725 led to the chartered compani...